UBS to offer social investment fund

UBS has become the first bank to make use of new UK tax reliefs for social investment, by launching a fund that will offer clients a financial return for backing projects that help to reduce poverty.

From next week, clients of the Swiss bank’s wealth management unit will be able to put money into a £5m fund run by impact investment specialist Resonance, enabling them to support social enterprises and gain 30 per cent upfront tax relief on the money they commit.

Resonance’s fund is the largest to date to offer social investment tax relief (SITR) — a tax break introduced by the UK government in 2014 to encourage private investors to fund social services and community projects at a time when local government spending is being reduced.

But the involvement of UBS is the first indication that social investment in the UK is starting to move into the financial mainstream.

“This is about moving profit-seeking capital into solving social problems,” said Jamie Broderick, head of UBS Wealth Management in the UK. “Where impact is the priority, the answer no longer needs to be philanthropy.”

Resonance aims to start funding a dozen social enterprises in Bristol, south-west England — each dedicated to tackling poverty-related issues such as employability and homelessness.

Much of this funding will be in the form of loans and, depending on the success of the projects, the fund manager has said it can generate an annual return of 7.1 per cent for higher rate UK taxpayers, taking the tax reliefs into account.

Given the higher risks of SITR-qualifying investments — which are not allowed to be backed by assets such as property — the Resonance fund is restricted to sophisticated and wealthy investors. Resonance is looking for individual investments of at least £10,000 and Daniel Brewer, its managing director, said investors should be willing to tie up their money for six years.

Tom Hall, head of philanthropy services at UBS, said SITR — which is available for both debt and equity backing of social enterprises — should not be seen purely as a subsidy for investors. “The tax relief doesn’t fund excess returns for investors, it subsidises charity borrowing.”

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The shrinking state: should investors fill the gap?

Generous tax breaks for social investment granted in last years’ Budget provoked much interest from philanthropic-minded investors, though there has been a limited take up. This could change later in the current tax year. A huge increase is anticipated to investment limits, which is expected to galvanise interest in the sector.

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However, some advisers have expressed concern about the lack of liquidity in SITR investments — there is no established secondary market — and the lack of any record of delivering returns, or successful exits, for investors.

Charles Mesquita, a senior director at Stanhope Consulting, warned investors to approach social investments with caution. “You need to be very clear about what you’re trying to achieve . . . [and need] expertise to validate if it is a good business idea or not.”

Mr Broderick also acknowledged that tax-efficient social investment funds remained in their infancy. “It will be a long time before people make money on SITR,” he said. “It’s not going to be a money spinner any time soon.”

Nevertheless, Gavin Francis, founder of Worthstone, an adviser that carries out due diligence on social investments, suggested the support of UBS would “bring momentum” to the market.

Low investment limits have so far held back the development of SITR, which has failed to attract significant backers to the sector since its launch in April 2014.

But the UK government has applied to the EU to increase the amount that social enterprises can raise using SITR from £300,000 to £5m a year, with a cumulative maximum of £15m. Social investment groups are hoping for approval later this tax year.

With higher investment limits, Resonance aims to replicate its fund to other UK cities including Manchester, according to Mr Brewer.